Missed Opportunities for Married Couples Trying to Save
Written by: Allison Berger
We work with a lot of couples to help them plan for their long term goals. In some cases, we work with couples who keep their financial lives separate. Often this is the case with newlyweds who have yet to combine accounts and are not quite comfortable sharing all of their financial details with their spouse yet. It can even be the case with couples in their 50s and 60s who have kept separate accounts for many years.
In any case, planning for your financial future together is essential. Not only because financial issues are one of the leading causes of fighting in relationships, but also because planning separately can lead to significant missed opportunities that can negatively impact your wealth.
Below we list some of the common missed opportunities when married couples fail to take a holistic view of their financial picture:
Best Use of Retirement Contributions
If both spouses are employed, it is important to evaluate the retirement plans available from each employer. One may have a more generous match or very high costs. If you are not able to maximize contributions to all accounts yet, then it may make sense to fund one plan to a higher extent than the other. Investment choices are also fairly limited in employer sponsored plans, so one plan may have a great foreign choice while the other has low cost index funds or a generous fixed account. Looking at the whole picture together can allow you to build a more balanced portfolio while taking advantage of efficiencies that can boost your long term net worth.
Double Roth IRAs
Roth IRAs are the gold standard of savings accounts. Contributions go in after tax, growth is tax free, and withdrawals are completely tax free in retirement. You can also always withdraw your contributions tax and penalty free. This makes them a great tool for college savings and as back up emergency funds. However, in order to be eligible to contribute your AGI has to be <$184-194k for Married Filing Joint couples. In many cases we find that increasing retirement contributions a few percentage points, taking advantage of an HSA, FSA, or deferred compensation plan will bring a couple into eligibility for this valuable savings tool.
In some cases, when one spouse earns less than the other they can feel like they are not “contributing to the household” as much when their retirement contributions go up since their take home pay goes down. However, increasing retirement contributions in order to make Roth IRA contributions will have a net positive effect on their net worth. This is a very powerful tool to improve your long term financial situation.
Access to a 457 Plan
In the same vein as retirement contributions, certain employers (state or local government or tax-exempt organizations) offer access to a 457 plan for retirement. These plans are unique in that contributions to 457 plans are not classified as salary deferrals by the IRS. Therefore, if you participate in a 403b or 401k plan and a 457 plan you can contribute $18k to the 401k or 403b AND $18k to the 457 for a total of $36k pre-tax retirement contributions in one year ($24k/$48k for those over age 50). This can lead to a huge reduction in taxes now and put your retirement plan into hyper drive.
The problem is, most state and government workers, besides doctors and lawyers, don’t make enough money to defer that much toward retirement. But, they might have a spouse who makes a higher income. This might allow the lower earning spouse to defer the majority of their salary toward retirement pre-tax while the other spouse’s income supports the day to day expenses. For super savers, this may also bring you into Roth IRA eligibility, a savings trifecta.
So far we have discussed retirement contributions that can decrease your taxable income. There are also tax benefits that come with being married like writing off one spouse’s business losses on the joint tax return and leaving assets tax free to your spouse at death.
We all know that life insurance is necessary for young couples raising a family, particularly on the primary wage earner. It may also be important to hold a policy on a spouse who stays home with young children, since a premature death could necessitate additional expenses for the surviving spouse. Later in life insurance can also be used to allow for a higher lifetime payout from a company pension. In most cases pensions are offered with multiple choices for survivor benefits. These all come at a cost of course and if the pensioner is relatively healthy, holding a life insurance policy for present value of the income stream may be a cheaper option.
Social Security Claiming Strategies
Last but certainly not least is Social Security. This is definitely a financial decision you want to make as a couple. About a third of people claim benefits at age 62, but in many cases this leaves a lot of money on the table, particularly if there is an age difference between spouses. If one spouse has a longer life expectancy than the other, it may make sense for the higher earning spouse to delaying claiming benefits until age 70. This would allow the surviving spouse to receive that higher benefit over the course of their lifetime.
Social Security is also an important consideration for divorced spouses. If you were married for more than 10 years and never remarried, you are still eligible for benefits based on your spouse’s earnings history. This may be more beneficial than receiving your own benefits. You are also eligible to receive your ex-spouse’s full benefit upon their death. This is a benefit you do not want to miss out on.
Retirement Planning Has Its Limits: How to Prepare
Retirement planning is one of the issues that commonly leads clients to consult financial advisers. One of its essential aspects is creating a plan to save and invest in order to provide a comfortable retirement income. Ideally, this starts many years ahead of retirement, even as early as your first paycheck.
As retirement comes closer, planning for it expands to take in a host of other considerations, such as deciding when to retire, where to live, and what kind of lifestyle you hope to have. When retirement becomes a reality, the focus shifts to carrying out the plan.
All of this planning is crucial. Yet, for both financial advisers and clients, it's good to keep in mind that planning has its limits. In the post-retirement years, it may be helpful to think in terms of preparing for old age rather than planning for it.
The older we get, the more important this distinction between planning and preparing becomes. Too many life-changing things can happen without regard to our best-laid plans. Often they occur unexpectedly, resulting in emergency situations where urgent decisions have to be made. A stroke or a fall, a diagnosis of terminal illness, a broken hip that leaves someone unable to go back to independent living—and suddenly, right now, the family needs to find an assisted living facility, arrange for live-in help, or sell a home.
What are some of the ways to prepare for these contingencies?
- Explore housing options well ahead of time. Find out what assisted living, home care, and nursing home services and facilities are available where you live and whether they have waiting lists. Have family conversations about possibilities like relocating or sharing households.
- Research the financial side of these options. Investigate the cost of hiring help at home, assisted living facilities, and nursing care centers. Find out what is and is not covered by Medicare and long-term care insurance. For example, people are sometimes surprised to learn that Medicare does not pay for nursing home care other than short-term medical stays.
- Designate someone to take over decision-making, and do the paperwork. Execute documents like a living will, medical power of attorney, and contingent power of attorney. Update them as necessary, and give copies to your doctors, your financial planner, and appropriate family members.
- Start relatively early to downsize. Well before you're ready to let go of possessions or move into smaller housing, start considering what to do with your "stuff." Focus on the decisions rather than the distribution. There's no need to get rid of possessions prematurely, but decide what you want to do with them—and put in writing. Do this while it's still your choice, rather than something your family members do while you're in the hospital or nursing home
- Do your best to practice flexibility and acceptance. No matter how strongly you want to live in your own home until the end of your life, for example, it may not be possible. The physical limitations of aging can limit our choices, and even the best options available may not be what we would like them to be. It is a profound gift to yourself and your family members to accept these realities with as much grace as you can muster.
Finally, please don't underestimate the importance of planning financially for retirement. Because the bottom line is that you can't plan for all the things that might happen as you age, but you can prepare to deal with them. One of the most useful tools to cope with those contingencies is having enough money.
- 1 of 1402